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Exam 5: Risk and Return: Past and Prologue

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Question 31

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Annual percentage rates can be converted to effective annual rates by means of the following formula:

A) (1 + (APR/n) ) n - 1
B) (APR) (n)
C) (APR/n)
D) (periodic rate) (n)

E) A) and B)
F) A) and D)

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Question 32

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A portfolio with a 25% standard deviation generated a return of 15% last year when T-notes were paying 4.5%. This portfolio had a Sharpe measure of ________.

A) 0.22
B) 0.60
C) 0.42
D) 0.25

E) None of the above
F) B) and C)

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Question 33

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The arithmetic average of -11%, 15% and 20% is ________.

You are considering investing $1000 in a complete portfolio. The complete portfolio is composed of Treasury notes that pay 5% and a risky portfolio, P, constructed with two risky securities X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately ________ in the risky portfolio. This will mean you will also invest approximately ________ and ________ of your complete portfolio in security X and Y respectively.

Which of the following are correct arguments supporting passive investment strategies? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.

The holding period return on a share was 32%. Its beginning price was $25 and its cash dividend was $1.50. Its ending price must have been ________.

Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a Treasury bond that pays 6%. If you invest $50 000 in the risky portfolio, your expected profit would be ________.

You have an EAR of 9%. The equivalent APR with continuous compounding is ________.

Which one of the following measures time-weighted returns? I. Geometric average return II. Arithmetic average return III. Dollar-weighted return

The holding period return on a share was 25%. Its ending price was $18 and its beginning price was $16. Its cash dividend must have been ________.

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return and a 30% chance of losing 6%. What is your expected return on this investment?

You are considering investing $1000 in a complete portfolio. The complete portfolio is composed of Treasury notes that pay 5% and a risky portfolio, P, constructed with two risky securities X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury notes then the dollar values of your positions in X and Y respectively would be ________ and ________.

If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions you should calculate the ________.

Historically the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ________.

If you are promised a nominal return of 12% on a one year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

You invest $1000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bond with a rate of return of 6%. A portfolio that has an expected value in one year of $1100 could be formed if you place ________ of your money in the risky portfolio and the rest in the risk-free asset.

The dollar-weighted return is the ________.

Suppose you pay $9800 for a $10 000 par Treasury bond maturing in two months. What is the annual percentage rate of return for this investment?